Voluntary Carbon Market: can it meet the growing demand?

By Jos Cozijnsen

Probably not, because not only the quantities are increasing, also the quality wanted is on the increase. And both elements cause the prices to rise.

Some new reports on the status of the voluntary carbon market showed an increase from 24 million in 2006 to 785 million tonnes of CO2 in 2007. My expectation for 2008 is for over 200 million tonnes.
The US part of that market is almost 75%. So, where in the EU market the voluntary offsets are used for compensation of emissions, in the US, lacking a mandatory market for now (see next article), the voluntary market is the only game in town.
Both in the US and in the EU the demand of CO2 certificates to offset travelling etcetera in 2007 was three times higher than the year before. The supply cannot meet the demand for several reasons:
• It costs time to identify and develop new offset projects. It can take 2 years from the start to first issuance. While in the mandatory market of course the allocation and trading starts as of day one, once a company joins that market;
• There is a tendency to standardise the certificates traded (into VCS for example) and the accompanying verification rules to increase liquidity. But with a slow growing supply this will only make the prices peak more because it leads to more delay and bureaucracy as well;
• The market wants higher standards against double counting and more focus on energy saving and renewables. This causes higher transaction costs and therefore a higher price. Currently VERs are traded between 3 and 25 Euro. The reason for the difference is only partly to blame on the difference in standards, type of projects, delivery date and volume. More and more you see the voluntary market behaving like the mandatory market.
The development of more auctioning of VERs and organised trade in VERs like through the Climex platform helps to disclose the price and the overall shortage at the moment of the ‘right’ VERs.
The offset supply may increase soon. There is a proposal by the Commission to allow less CDM credits after 2012 or only allow higher value CDM projects.. Also, the Climate negotiations discuss proposals to discount the ‘environmental value’ of the CDM. So, as a consequence I expect we will see an increased use of CDM in the voluntary market through use of its leftovers and also of the disapproved projects of the mandatory CDM Market.